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“Buy and Hold” No More: The Resurgence of Active Trading (a16z.com)
169 points by cristiandima 25 days ago | hide | past | favorite | 305 comments



I am a hedge fund guy who invests his own $$$$ passively so make of this what you will.

There will always be a mix of active and passive.

Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average

This breaks down if passives outnumber actives, or if actives are exceptionally stupid.

Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.)

Or, imagine company X will obviously default but stock keeps going up because passives are obligated to buy. Very easy to exploit by going active!

Finally - think about this. Does your index fund have any GME? That part of your portfolio trades at the price set by Reddit apes. The more of that goes on, the more tempting it is to go "active" on the other side.


So I've been trying to work this out. Previously I understood the idea "The passives are simply the average of the actives". So even if you had 99% passive, so long as the actives were doing their homework the system would work, but as you said you need to watch for exploits.

But then I had the question: When the world has gone passive, who is left as an active investor?

1. Wallstreetbets users who do poorly on average, and they are small

2. Highly skilled Hedgefunds like Medallion who do great on average, but they are small

3. ... the company using debt to buyback its own shares

So the key behind this entire stock market is that its a beauty contest where you need to make guesses as to what everyone else will do. But as active investors shrink with the increase in passive, what we are allowing happen is that the companies who use debt to buyback their shares are whats driving the market. Every dollar they spend on their stock is then magnified 100x by the big passive funds, and both 1 & 2 have no agency other than to try to get swept up in the winds.

I have not yet done the intensive research to understand how large 3 can effect a stock, does anyone here have any idea if this will be a problem, and if we are already seeing signs that this is happening already?


Think of it this way: if there are too many "free riders" in the form of passive investors, then ... it will become easier for active investors to make money, and beat the market, and more people will actively invest their money (or invest in actively managed funds).


Yep, there will usually be opportunities for arbitrage for active traders if there are too many passive investors. I suspect there will be some sort of equilibrium between active and passive at some point.

The thing is that I'd rather be doing other things with my time, so I'm a passive investing kind of guy. Imagine getting the market return for doing nearly nothing for dirt cheap. That's a high growth rate to level of effort ratio!


An equilibrium exists but expected returns of active and passive are unknown. Would it reach equilibrium or could there be a crisis due to passive allocating funds poorly.


I mean, I don't know, I'm a random guy on the internet saying stuff, not an analyst.

But I think a key point is that active investing already exists and dominates the market -- it's still like 85% active. People choosing to invest in passively managed funds are doing so because they see a higher return. Maybe the choice is sticky and people won't switch back if the returns begin to fall, but people still have to switch in.

So building up a surplus of passive investors requires people to continue to switch to a passive strategy after the returns between passive and active level out and reverse. And not just a little -- profits from investing are returned to investors, and reinvested. So if the equilibrium between active and passive investing is X% of the market passive, and we get up to passive investors at X+10% of the market, then the X+10% of passive investors will see a lower rate of return than the 90-X% of active investors. Which means -- unless those active investors take their surplus profits and dump them into then-less-profitable passive funds, before long the active investors will have 91-X% of the market and the passive investors will have 9+X%. Absent continued switching, the feedback of profit re-investment will push the balance back to equilibrium.


You got some good replies to your question (which is a very good one!) but I'll take a stab at it like this:

A market is "too passive" when it becomes exploitable due to perfect predictability. But - that is the very thing that will keep it from ever reaching that level of passivity. Exploiting it is an active step, then someone else bets against the exploiter, etc.


>the companies who use debt to buyback their shares are whats driving the market. Every dollar they spend on their stock is then magnified 100x by the big passive funds, and both 1 & 2 have no agency other than to try to get swept up in the winds.

I've always found stock buybacks intriguing and confusing. Here's a hypothetical scenario that seems to go against what you're saying:

Company A buys back $1 work of stock. Since there is now $1 less in Company A's bank account, that company is now worth $1 less. So the market cap should in theory be $1 less. Since the market cap should be $1 less, and $1 of stock disappeared, those perfectly balance out and mean the stock price should stay the same.

Now the index investors take a look at the situation. Company A's market cap has shrunk, whereas other companies' market caps haven't. So Company A has a smaller share of the index than other companies than it had before. But the index investors still have the old ratio of Company A to other companies, so they are overinvested in Company A. They all sell a bit of Company A in order to get the correct balance according to the index. Company A goes down in value.

So a stock buyback caused the price to go down.


market cap = book value + discounted future cash flows = share price * number of outstanding shares

When you do a buyback, the book value drops (company loses cash), but the discounted future cash flows remains unchanged. The number of outstanding shares also drops.

The net result is the stock price increases as a company accumulates cash and uses it for buybacks because the number of outstanding shares drops.

Another way of thinking about it is that it's the same as dividends, but the dividend only goes to the sellers of the stock during a buyback.


Market cap = whatever the market decided at that time, and is determined by offer and demand.

The whole book value + discounted future cash flow does not reflect the real stock exchange at all. If that was the case no investor would want share buybacks because as you say it would only reward the ones who sell...

When taking into account offer and demand stock buybacks make more sense: the buyback increase the demand for the stock. The offer will increase a bit (a few might sell) but not in the same proportion because the offer is not very elastic (most of your investors are in for a long ride and are not going to sell), so the price goes up, you get rid of some short term investors, and the long term investors see their share increasing in value. Everybody's happy and the dividend ratios do not mean anything anymore.


I don't understand your reasoning for why the price increases. To use your equation with my original example:

Initially:

market cap = $100

book value = $20

discounted future cash flows = $80

share price = $1

number of outstanding shares = 100

After the buyback:

market cap = $99

book value = $19

discounted future cash flows = $80

share price = $1

number of outstanding shares = 99

So the market cap didn't change.

I agree it's effectively the same as dividends (although I think buybacks are slightly better for the taxes of stockholders).


Buyback increases the value of the outstanding shares, which is great for those in the company with stock options.


You'd probably be interested in listening to this talk by Michael Green: https://www.youtube.com/watch?v=x-rJciYZmi0

He goes into a lot of data around the idea that the market is "too passive", and he believes that we were already at that point last year before the pandemic.


I really enjoyed and learned a lot watching this, thanks.


> 2. Highly skilled Hedgefunds like Medallion who do great on average, but they are small

Medallion usually does well, but hedge funds underperformed in the 2010's.


> Medallion usually does well

That's a bit of an understatement. The lowest yearly return since 1990 after fees and expenses has been 20%. Since 2005 their lowest yearly return has been 29%.

They practically print their own money. Their strategies appear to have low capacity, I'll give you that.


If you consider #3 and don’t limit it to only debt-driven buybacks, then the price increase can be absolutely insane.

The best example is Berkshire Hathaway stock (BRK A share) which currently trades at $402,620 per share.


For those that are interested, this is known as the Grossman-Stiglitz Paradox. See their original paper, "On the Impossibility of Informationally Efficient Markets" (1980). In my opinion, this is one of the most important econ papers ever written. The paper itself is not too technically difficult: the model consists of CARA (i.e. exponential) utility functions and normal random variables, which results in linear demand functions. Solving for the equilibrium is possible with a little bit of linear algebra.

For more recent (and much more technically difficult) treatment, you can take a look at Garleanu and Pederson (2018) ("Efficiently Inefficient Markets for Asset and Asset Management").


Your active strategies are not against passive traders, they're against other active traders. You can't create one of those differential bets trading only with index funds as they won't take the other side of the unbalanced position you want as they're obliged to follow the index. In your scenarios you'd be winning against some other active investor taking the other side of the bet. Active as a whole can only beat passive as a whole if the market becomes so screwed up there's too much tracking error for passive to work properly. At that point the passive index no longer represents the market average and the active traders can take a larger share of the gains.


I'm 95% passive, but I think a place where active strategy was observed was with TSLA. actives knew it was on it's way to the index and piled on into it, once it got into index, it got bid up some more and then actives cashed out. passives didn't enjoy the ride up, but suffered the cost of the ride down.


This is becoming less true as technology has made total market indexes easy and cheap. Instead of buying the S&P 500, I can buy VTI, so TSLA was in my portfolio before and after, to no real effect.


This is what "getting priced-in" looks like. There are strategies around buying shares of companies where their acquisition has been announced, but hasn't closed. Buying is basically a bet that everything goes smoothly.


> passives didn't enjoy the ride up

Passive investors who only invest in the S&P 500 didn't enjoy the ride up. But there are plenty of other indexes that people invest in passively that would have held TSLA prior to being added to the S&P 500.

I own SCHB, for example, which tracks the Dow Jones U.S. Broad Stock Market index, and would have owned shares in TSLA long before it was added to the S&P 500.


I think your use of theory and terms is right but you aren't visualizing how it would work in the world where nearly everyone is passive.

Simplest example I cited already: it becomes obvious that company X will default in short order, but it's a member of an index and the market will "buy" it anyway: I can short it (by borrowing from the passives and selling it to them next time they buy the index) and never have to cover since it's bankrupt. That's a simple example of a single-player active skewering the passives.

You can try to figure out what this means in terms of tracking error but it's kinda irrelevant to my point.


In your hypothetical 99.9% passive scenario that doesn't work either because passive funds have long ago disallowed borrowing their stocks to short. If you start with a ~100% passive premise the reality is so different to what a normal market looks like you can't just propose a normal strategy and expect any of it to work.


Hi, I'm not sure I follow this idea that passive investors don't lend their shares. Is that meant to describe the hypothetical world of no active traders, as discussed above, or is it meant to describe the present situation in the investing world today?

In the world as it stands today, passive ETFs and index mutual funds are a huge source of shares to lend. It's one of the ways they can lower the cost of the passive fund (or slightly increase returns above the passive benchmark), as the proceeds from lending shares are returned to investors in the fund. (Not always, but the good ETF operators do this.)


If passive funds made this tradeoff then how would they be influenced by a company going bankrupt? They would just change the tradeoff when that becomes a problem since this is not part of the passive investment strategy.


In the scenario of a company that is obviously not a going concern you can sell stock short to passive investors. The company will then fail and it’s stock will be worth 0. You get to keep the money. I guess the worry would be that the company could raise money by selling shares and use that to avoid becoming insolvent, but at some point a company is going insolvent faster than it can issue new stock.


You can't sell stock short specifically to passive investors. You have to sell it into the market. And since you're trying to sell only that stock and passive investors are buying the whole market your actual net counterparty is a set of some other active traders that hold the mirror position to yours, not the passive traders. The passives will always get the average of the market in that scenario and your above average returns have to come from someone else's below average returns.


I just wrote to you the same thing the parent of your post did. You are missing the part of the scenario where "everyone" except the one player is passive. Both I and the poster broke down the mechanics step by step for you...


You didn't break down anything step by step. If you actually start with an 100% passive market and try having a single active investor in it nothing works. Funds can no longer buy and sell the basket of stocks they need. At that point they'd just trade among themselves and simply not trade with you. To actually be able to trade in the way you describe you'd need a 99.9% passive market where there are still some active traders you are trading with and together you are creating tracking error for the passives siphoning off their gains, which is what I described.


"Imagine 100% is active" <- Did you mean "Imagine 100% is passive"?

That said, I as a buyer-and-holder, I welcome the hordes of active traders willing to expend time, effort, and money to discover the price that I too will be able to trade at.


Thanks! Fixed!


> Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.)

With more and more assets going into passive funds, when might we actually see them owning such large fractions of companies that a play like this is possible? Google suggests that 10-15% of the SP500 is owned by mutual funds. Presumably there's going to be an inflection point where this becomes problematic.


If you’re holding then you’re neither buying nor selling, and so you don’t participate in setting the price at all, until the day you sell. Only the people (and machines) that are trading have any say. So it seems like it wouldn’t be the percentage of free-riders that’s an issue, but rather that the size of the active market shouldn’t be too small.

Index funds need to rebalance so they’re not just holding, but it seems like for passive investors, they approximate holding? Maybe the rebalancing would tend to exaggerate the effects of active trading?


>> think of the recent GME short squeeze but in reverse

Reverse how? There are so many axis I don't know which to use as the basis of my flip. If you care to, please explain a bit more in detail.


Flip it on all axis, I guess :)

But, sure. Let's say I know that you (index fun) are obligated to buy stock X tomorrow and over all foreseeable future. I am gonna hoard those shares at no risk and sell them to you at a VERY VERY painful price, since you have no room to say "that's too expensive, no thanks"


How are you going to hoard "at no risk"? You're trying to corner the market for a given stock in an index pushing it's price way up and thus exposing yourself to the price crashing down and wiping you out. Meanwhile the passives are routinely buying and selling index funds depending on their need to save or raise cash so the net inflows into that stock are positive or negative depending on that. And that stock is only a small part of the total portfolio. Depending on how their specific timing works out your scheme is a net positive or negative but it never wipes them out. Your risk is way worse, particularly if you need to leverage to buy the whole position. Even if your play was to corner the market completely and own almost the full company the end result would be it being removed from the index for there not being enough float around. Then all the index funds dump what they had of it, and you lose your shirt.


That's the point. An asset can't crash in a 100% passive market because the funds buying the assets are obligated to do so without any discretion. The point is that such a situation is unrealistic.


It can crash even more violently by being removed from the index, which would happen if someone actually cornered the market for that stock as I described. My point is that the situation is unrealistic but in a completely different way than what is being described.


I agree with you mostly, that there are spaces where active can make great bets. But this particular example isn't quite true. Passive Index funds are not automated 100% and have discretion on when/how closely they track the index. They DO have to try and track the index, but that doesn't mean they have to own every stock IN the index, nor does it mean they have to buy X stock tomorrow, regardless of price.

source: Any prospectus/annual report of a large index fund, such as VTI.


Why would a company ever default if it’s stock price can’t go down. Couldn’t it just sell more stock to cover it’s debts?


That’s not quite right about passive and active though. It almost always resets every quarter (or other liquidity events). Passive introduced delayed price discovery and as a result greater volatility around earnings (or liquidity events). But over medium to long term passive vs active should not matter.


Why isn't it "quite right?" I spelled out 3 scenarios that can play out and obviously will given the structure and incentives. Where do you disagree?


Because passive does not necessarily mean index. You can be passive and concentrated (see ARKK). And more importantly real world indices are moving target to begin with. They’re just very rough approximation of market basket. SPX is not representative of market as it relates to mpt at all. In fact that’s likely one of the biggest myths in modern finance.


The fact that Arkk's own website refers to itself as an active equity etf should prompt you to reconsider your definition of these terms.


> Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average

No, actives can make money on average. If the actives do expensive research and learn things, they can buy good stocks at low (below-fair-value-given-new-knowledge) prices, drive up the price, and the passives follow later, buying at high (fair) prices. No one needs to lose, but actives accrue a disproportionate fraction of the gains.

> This breaks down if passives outnumber actives

Hypothetically there is a level of passive investing where the system breaks, but (1) this has nothing to do with 50% threshold (a small active minority can be fine) and (2) the are natural strong forces that prevent this from happening (as the fraction of passives increases, the reward for being active increases, drawing in more actives).


Article misses the point (perhaps due to their capital investments) that the resurgence in active trading is almost entirely just gambling, but exempted from casino regulation.

Also, saying "no more" to refer to a blip fad is a ridiculous healdit.


Roaring Kitty’s posts that kicked off the GME craze had some very thoughtful analysis. And recently I watched some videos about dividend investing on YouTube that I would consider reasonable investment advice.

I agree that there is a lot of gambling and excessive risk taking going on. And I myself stick to a 3 ETF portfolio because I like the simplicity. But to call it almost entirely just gambling I think is missing the point. There is some interesting and good stuff happening now in the intersection of social media and low cost trading, and it makes sense I think for VCs to be investing in that space.


Without being totally dismissive of every person who has contributed to the platforms you mention...99.99% of the stuff on YouTube is terrible, and most of the stuff written about GME was total nonsense.

It is difficult to convey this because, in the end, you have no idea either so you don't know whether there is useful stuff on YouTube or if I am just talking nonsense too...but it is so bad, and it gives the misleading impression that picking stocks is very easy. It isn't, people do CFAs (allegedly, a hard exam), MBAs, and work in fund management every day for decades...and will never come close to being profitable (indeed, what is amazing is how many people have no knowledge but end up doing okay...it is remarkable...the post is a perfect example, no content, no apparent understanding of investing...somehow the guy is a billionaire from investing, like Chamath...amazing).

It is gambling (the distinction between gambling and investing is information), what most VCs are doing in the space is financial terrorism (stuff like WealthFront is an unbelievable scam, it is 1980s-style financial advice), and most people should take your approach (although it is still very easy to go wrong with 3 ETFs...most people will get there though).


In a sense, you both are correct. The stuff on YouTube is terrible, but it is also used by many (some made a lot of money and so are very vocal about it). A 1000 YouTube videos promoting a terrible coin. The price is going up. Even the one who went to YouTube to consume the drivel and act on it made some money. 5 videos were top-notch production quality, measuring itself against the top paid analysis.

A crazy thing went on early with ETH bot trading. Of course, if you are going to download a bot from Github which works on a few trends and technical indicators, you should not expect to make a lot of money. But many did -- It is easy to predict whether a rocket is going up. The features the bot used are still indicative (at other timeframes), because so many were running them, influencing the price in future timeframes.

> misleading impression that picking stocks is very easy

At least picking a stock yourself is easier than predicting what stock someone else will pick.

> MBAs, and work in fund management every day for decades...and will never come close to being profitable

That seems like a cosy lifestyle not worth bragging about, good job security. Rooting for the night janitor at a small hotel though, who put a 1000$ on doge coin when first reading about the rememe potential.

But I agree with the gambling and financial terrorism for kicks. More as a warning against financial irresponsibility, less as in "stay of my turf!".


Why is Wealthfront so bad? Their fees don’t make them cheap, is that it?


Correct. What they are selling you is an asset allocation, this turns on it's head all the innovation since the early 90s...and the performance you likely get will be indistinguishable from what most people could achieve on their own.

One of the big advantages that savers have today are open platforms (there was a time when fund managers ran their own platforms), low dealing costs, low spreads, and ETFs. All that investors need to do is just work out the asset allocation themselves and they will save huge amounts. And I would guess 95% of people reading this are able to do it.

Just to be clear, we are looking for a least bad situation. Asset allocation is very complex, there is no way most investors can get an amazing result themselves but what most investors don't know is that WealthFront have zero chance too. So the aim is to equal what they do without their mad fees (I have no idea how they charge so much, marketing? I don't know, I know small advisers that were profitable charging lower fees...it makes no sense).


They make claims of better tax efficiency via tax-loss harvesting [1]. I don't know or care enough to evaluate it, but maybe it's better for some people, even if the allocation is no better than an ETF? Even if it worked, I wouldn't bother to do it manually.

This doesn't matter for a retirement account, though.

[1] https://support.wealthfront.com/hc/en-us/articles/209348486-...


That is going to depend on what the rules are, and what rates you pay. But is tax-loss harvesting beyond the wit of everyone but WealthFront? No. If you aren't bothered to do it manually then it can't be a big benefit for you...it is always amazes me that companies manage to base their products around utterly pointless/marginal features that no-one uses, like why do you care? It is like people choosing an advisor because of their charts...yep, they got the charts from a third-party charting provider for $10/month, and you are going to pay tens of thousands (or more) over a lifetime. Smh.


>If you aren't bothered to do it manually then it can't be a big benefit for you...

Wealthfront has economies of scale to write a program to perform tax loss harvesting automatically. Just because it's not worthwhile for me to do it manually myself doesn't make it not worthwhile for a program to do it automatically. Wealthfront does daily tax loss harvesting on individual stocks. That would be a tremendous amount of work for me to do manually.

That said, I don't know whether Wealthfront's benefit outweighs their 0.25% fee.

I guess what we really need is a well-regarded open source program that hooks into brokerage's API and does this advanced tax loss harvesting.


> Wealthfront does daily tax loss harvesting on individual stocks

Does WealthFront do anything at the individual stock level? My understanding from looking at their landing page [1] is that they basically just allocate your money across a number of publicly traded ETFs:

> How do you choose my investments?

> We choose exchange-traded funds (ETFs) that track an index, such as the S&P 500 or emerging markets. Wealthfront chooses the ETFs with the lowest costs and proper tracking of their index.

Also, you pay the expense ratios of those ETFs in addition to the fees that WealthFront charges:

> What are the costs to invest?

> We’re glad you asked. Our annual advisory fee is 0.25%. On average, you’ll also pay a low 0.06%–0.13% expense ratio. Companies who run investment funds charge this fee, and it comes straight out of that fund’s performance (you aren’t billed directly). Everyone who invests in ETFs pays this fee.

I think would be fairly easy for any ETF investor to approximate WealthFront's tax-loss harvesting strategy in their own brokerage accounts. E.g. simply go in once a quarter and sell any lots of VOO for a loss where possible, and replace with an equivalent like SPY.

[1] https://www.wealthfront.com/investing


Above $100K, Wealthfront mixes individual stocks and ETFs.

https://support.wealthfront.com/hc/en-us/articles/211005023-...

(I am a customer.)


In order to avoid wash-sale rules, you’d want them to be similar, but slightly different; such as VOO and VTI.


According to Investopedia at least [1], VOO and SPY are not considered substantially identical by the IRS:

> For example, if an investor sells the SPDR S&P 500 ETF (SPY) at a loss, they can immediately turn around and purchase the Vanguard S&P 500 ETF.

> The rationale is that the two S&P 500 ETFs have different fund managers, different expense ratios, may replicate the underlying index using a different methodology, and may have different levels of liquidity in the market. Presently, the IRS does not deem this type of transaction as involving substantially identical securities and so it is allowed, although this may be subject to change in the future as the practice becomes more widespread.

[1] https://www.investopedia.com/terms/s/substantiallyidenticals...


I wonder where that page gets its information. Its own quote links to an IRS document that doesn't seem to mention this case. Other places online recommend against it.

>There has been no IRS ruling on whether ETFs from two different companies that track the same index are considered substantially identical.

https://www.fidelity.com/learning-center/investment-products...

>Investment advisors and tax planners recommend against selling an index mutual fund from one fund company and buying another index fund tracking the same stock index from another mutual fund company.

https://finance.zacks.com/substantially-identical-mutual-fun...

>And while arguably swapping from index funds like SPY to IVV are almost certainly a wash sale abuse (or at least, a transaction that should trigger the wash sale rules)

https://www.kitces.com/blog/the-wash-sale-problem-when-tax-l...

If you look at Wealthfront's own documentation, when they do tax loss harvesting with ETFs, they find ETFs that track similar but not identical indexes:

https://research.wealthfront.com/whitepapers/tax-loss-harves...


Yup it sounds like a bit of a gray area for now. I think for most people it probably comes down to the way your broker reports the transaction on your 1099. I.e. if my broker reports it to the IRS as a "covered" loss, that's probably what I would use when filing my taxes.


I don't personally care. I'm just saying that it's not crazy to want to do this sort of thing without figuring it out yourself. Maybe it pays for itself in some cases?


> ...but what most investors don't know is that WealthFront have zero chance too. So the aim is to equal what they do without their mad fees...

Can someone help me understand this comment as to my knowledge WeathFront (WF) fees were the lowest in the industry. For example people talk about Vanguard fees as also being low but they're between 0.25% and 1% [1]. If it makes a difference I'm specifically coming at it from the lens of IRA retirement contributions.

Is the parent post saying the alternative is to figure out what specific stocks/ETF/index WF is purchasing and then purchase those with something like eTrade?

TIA

[1] https://investor.vanguard.com/mutual-funds/fees


Those vanguard fees that you reference aren't really applicable in a comparison with WealthFront. Those are one-time fees when you buy and sell shares, and only apply to a very small number of mutual funds (emerging markets bonds, international real estate, etc). Most vanguard investors don't invest in these funds or pay those fees, and I believe WealthFront doesn't even offer equivalent investments.

On the other hand, you pay that 0.25% fee that WealthFront charges every year, regardless of the performance of your portfolio, and it can pretty quickly amount to thousands of dollars per year.

Most brokerages (Vanguard, Schwab, Robinhood, etc) don't charge any sort of equivalent fee - they are free to open and maintain. And yes it is fairly easy to construct an equivalent portfolio made up of ETFs in a standard brokerage account. You would be losing out on the convenience of WealthFront's automated rebalancing and tax-lost harvesting, though.

Is the convenience of automated investment, rebalancing, and tax-lost harvesting worth paying 0.25% of your total account balance every year? For me, no. But I know some people who are really happy with services like WealthFront and Betterment. Especially for someone just getting started with investing, I would have no issues recommending those services.

Edit: also just noticed you are referring to a retirement account. In that case, WF's tax-loss harvesting feature would not be applicable (since retirement accounts are tax-free), so even less of an incentive to go with WF vs. DIY.


> this turns on it's head all the innovation since the early 90s...

Would you mind just mentioning what that is?


> I watched some videos about dividend investing on YouTube that I would consider reasonable investment advice.

Do you happen to have those links?


Sorry I don't remember who the videos were from, and to be clear I don't personally use either YouTube or WallStreetBets as a source of investment advice - I tend to just stick to a super simple passive investment strategy. I just remember seeing some videos in my feed on YouTube and thinking "wow this is actually better than a lot of what I've seen on CNBC".

As an example, I did do a quick search just now on YouTube and a guy named Charlie Chang came up. [1]

I haven't actually watched any of his videos before, but I took a look through his introductory video and it all looks like pretty sound advice to me. He also does monthly videos where he recommends specific stock picks, and his fundamentals-based approached seemed totally reasonable to me. This is the type of content I had in mind when I said there are reasonable videos being published on YouTube.

[1] https://www.youtube.com/watch?v=giGcuofIYis



What 3 ETFs do you invest on?


SCHB, SCHF, and SCHE.

That's a bit of an oversimplification because I do have some other assets I've picked up over the years. But the bulk of my net worth is invested in those 3.

If I were to start over again I might even just hold SCHB, which I feel has enough international exposure to make SCHF and SCHE somewhat redundant, while also being more efficient for taxation purposes.


As a Canadian, I have a similar stance: the US stock market provides enough intl diversification.

Canada has a lot of resource companies which largely follow the global economy.

Most big corps have less than half of their sales in US.

Developed markets still pay with a visa/MasterCard and have iphones. Or the US owns a stake in their local equivalent. Or Amazon is expanding there.

Truly emerging markets barely have a stock market, but their citizens probably eye a Coca Cola, have an intel PC and an android phone doing searches on Google.


There's a potential tax advantage in splitting into different holdings. If you need money you can sell the one that hasn't gone up thus delaying or avoiding capital gains tax.


... and with much lower commissions than betting on horse/footballer/dog races.


Depends. There are sports betting platforms outside of the US that work like stock exchanges.

Betting exchanges can offer good liquidity, tight spreads and commissions as low as 2%


I do 99.9% of my gambling in the stock market because it historically is positive sum. Even with costs (commissions, fees, bid/ask spread). For me to win, you don't have to lose. Straight gambling cannot offer this.


Is it? Robinhood allows you to trade for free, but that's not the whole story. Bid-ask spreads add an implicit fee to each transaction. This is small for highly liquid stocks, but buying blue chip stocks directly also isn't exactly exciting. If you want the excitement of gambling you'd need to either use margin (borrowing fees) or options (worse spread).


If you bet on a liquid market, you will pay vig of something like 1-2%. Where I am, it is actually cheaper to bet (just think about how unbelievably fucked that is...you can see why VCs want to insert themselves into that) but in the US your trade costs are probably underneath that level all-in.


I do wonder if the surge will die down as everything opens back up. When the world closed down and there were no sports, there was nothing to gamble on. When RH was blowing up around GME, stats came out that many of their customers were playing around with relatively small amounts money. The amounts sounded pretty similar to what I hear people talk about throwing on a game. $25-$100 for the excitement.


except it isn't: if enough gamblers stick to one ticker, they can break the market. options aren't roulette and stocks aren't blackjack. casinos don't have this failure mode.

gamestop was the example of what happens in the limit - only the DTCC prevented a global financial crisis as a circuit breaker of last resort.


Sports bookmakers will ban your ass if you look to be any kind of sharp, or engage in arbitrage (exploiting their slow pricing).

Casinos wont let you put a billion $$$ on red or black just because they have a 1/37 edge on the roulette wheel. That variance is to high.

There are failure modes


Fair points. I had options in mind, casinos don’t have derivative bets afaik...


If enough retailers work in concert they start to resemble HF's.

>> if enough gamblers stick to one ticker, they can break the market

HF's, I assume, has had this power all along and they probably tried more than once to break the market.

So, what's the difference then, between internet hive minds and HFs and why should one take more blame than the other when it comes to "breaking things"?


More call options expiring in the money than shares available for example.


Casinos absolutely have that failure mode (which is why there are table limits)

Casinos need to ensure that they have enough liquidity to withstand a large bet hitting. The law of large numbers only works if you can survive the short term swings.


Fair point. In case of GameStop it was more like a casino running out of chips and being obliged to get them at any price. A real casino would simply stop letting people in... and that’s what happened with the help of DTCC.


> gamestop was the example of what happens in the limit - only the DTCC prevented a global financial crisis as a circuit breaker of last resort.

Nonsense, a few private funds losing a lot of money is not a financial crisis, it's just another Tuesday.


A few hedge funds losing 50% is not what I had in mind. Brokers going broke is that.


> only the DTCC prevented a global financial crisis

True heroes. God love em.


People broke the market on GME, but then they got rinsed for it. Hardly a win...


They almost did. Market owners decided they won’t have it that way, as they should or there would be many more losers.


The market owners weren't involved. The clearing company have been accused of "helping" hedge funds. But that's a conspiracy theory really...


The accusations don't make much sense in the context of helping hedge funds. They were preventing brokers and option market makers from default.

(Friendly reminder that the DTCC is basically owned by "Wall Street".)


speculative fever driven in part by intuition that currency is being debased?


The only issue I take with this article is their seemingly blase take on the risky investing behavior of Gen Z. Sure, if that's the lay of the land then use it to your advantage. But it seems a bit predatory.

Risky activities tend to hurt more investors than they help, and lead to a small number of big winners and many losers. You can't just increase risk and increase reward for everyone.

Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point. I know it's hard to hear, "Be patient" when you are young and have already been patient, but demographics is working against asset values in the next twenty years or so.


> demographics is working against asset values in the next twenty years or so.

As someone who is about half way towards retirement, how is it best to work with this?

My future retirement income seems to be mostly dependant on having the right selection of investments for my pension account to grow in time for when I stop working. It's currently split between a few low cost, broad indexes. But if we expect asset values to go down as older generations sell off, am I going to see this pension pot fail to meet what I need it to in order to cover my retirement.

My pension advisor just seems to blindly follow the script of 'passive beats active', and expects 5% annual return. Which I just go along with, mostly because I have no idea what else to do. Am I being too pessimistic when I really can't see 5% return being likely.

How do I go about making sure my retirement is provided for. It kind of annoys me I have to seemingly be constantly figuring out the market situation to make decisions on what's best. Why do I need to be a stock market expert to manage my pension. What I'd much rather do is pay for a future pension more like an insurance plan. I pay monthly now, and some experts who know what they are doing worry about the investment strategy, and I just get a fixed pension payment.


As you get older and look for lower risk exposure, you start looking at simple annuity products.

Preferably wait till this period is over and rates rise. If there’s a salesman eager to speak to you, you’re looking at the wrong product.


It sounds like you want an annuity. Your returns will likely be lower, with the issuer taking the risk (and getting the higher rewards), but you return is guaranteed and the issuer's is not.


If assets perform poorly then how will the annuity be funded?


The issuer funds it. It’s like an insurance policy. They’re contractually obligated to meet the terms (if the benefit is defined)


Presumably if the market was bad enough there would be a point where the issuer couldn't meet the terms.


Then the business/economy probably has larger problems that will be addressed (successfully?) by the government.


I can see a future where the US becomes much less restrictive with immigration (perhaps even promoting it) if the population of working adults drops significantly.


This was my reading as well. "They have a larger appetite for risk because the deck is stacked against them, and they've never seen a crash" feels like "We created a system where the young are desperate and are going to end up holding the bag" while containing no self-reflection on that.


>demographics is working against asset values in the next twenty years or so

I can't find the link now but I saw a recent paper that showed retirees aren't really spending down their investments in old age. Rather many of them will end up with more when they finally fall off their perch.


> Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point.

Probably not all of their assets though. Most people don’t get a death date after 65. I guess if people want to blow most of it before 80 that might make sense but you never know when you’re going to go. Still need to hedge against inflation.


Also a significant amount of assets are owned by the wealthy and won't go towards retirement.


> the older generations - one of which is very large - will need to sell their assets at some point.

Some of their assets (mainly houses, I’d expect). Anything they don’t sell can pass to their heirs and likely will even get a tax break (step up in basis) instead of a tax hit (estate tax exclusion is huge, at the federal level).


So where to put cash?


It depends on how soon you would need it. If saving up for a down payment expected within the next ten years, not stocks. Otherwise stocks.


Not a binary choice. Whatever lets you sleep at a zeroth order approximation. Some cash, some (most?) index fund(s). And if there is enough and you have the inclination: YOLO.


Frankly, I think passive investing has ruined the fundamentals of investing and in part responsible for the poor financial health of our economy.

While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.


The great thing about markets is they reward people who correct them. Pick a stock you're sure is bad and short it, you'll do everyone a favour and make a tidy sum...


Could you give us examples of those zombie companies? What are the ticker symbols and which indexes include them?


NNDM is an example. Hasn't seen any growth despite having a marketable product over their entire 8 year timeframe. Worth ~2B right now despite only making ~3.4M in revenue per year and losing ~50M per year. All thanks, to becoming apart of ARKK.


NNMD is a weak example. Out of the top 10 mutual fund holders only FNCMX is a passive index fund.

https://finance.yahoo.com/quote/NNDM/

And FNCMX is relatively small with only $11B in assets. So if you want us to take your argument seriously you'll have to provide a better example.


>Out of the top 10 mutual fund holders only FNCMX is a passive index fund

Uh... KOMP is the 3rd largest holder of NNDM and a passive fund. But regardless, whether these are passive/active is besides the point. Which is that most investment activity nowadays happen through vehicles that act as a basket of equities, and because of this, some of this money ends up flowing into bad equities given the vast majority of them don't trade on any sound fundamentals. I mean ARK surely doesn't, despite being actively managed.


ARKK is far from passive


Sure it is. The money you put into it is placed for you. That's passive. The fund itself may algorithmically place it in various things, but that's outside your control.

Conversely, look at super undervalued companies like JKS and CSIQ. JKS is the largest and fastest growing solar company in the world BTW. Yet these companies sit mostly under foreign market ETFs which have never been very popular, and hence why they largely remain undervalued.


That's not the definition of passive investing, what you're talking about is the distinction between agency trading and proprietary trading.

ARKK are active investors because they're using discretion to pick specific investments.

They say so themselves: "ARKK is an actively managed ETF"


NNDM has nothing to do with passive investors. It's bid up by retail hype.


Nope, recent prices are largely correlated to ARK activity. Price decreases have largely been due to the 11! offerings NNDM has recently made, to tap ARK investors money.

https://cathiesark.com/ark-combined-holdings-of-nndm


NNDM is heavily retail driven, it's been a fan favorite for a year. Their institutional ownership is only 10%[1]. It's similar to IBIO, NKLA, etc, where there's some attention from funds but retail hype on social media is driving it up.

ARKK has been buying NNDM, yes, but:

- they're not passive. they're active.

- they only own 5% of the stock. almost any public stock will have at least 5% owned by some fund, so it's not notable and doesn't disprove the notion that it's retail driven.

- ARKK are known to pile into retail frenzy stocks, so that correlation is going to exist often.

[1] https://www.nasdaq.com/market-activity/stocks/nndm/instituti...


Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times a day, and it wouldn't have any impact on institutional ownership %.

The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare the strong correlation in rising stock prices and ARK buying. Alternatively any retail investors that jumped in, likely did so from news of ARK buying.


  > Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times, and it wouldn't have any impact on institutional ownership %.
We're talking about pricing/valuation, not trading volume.

Institutional ownership does convey relevant information in regards to valuation, because it tells you who bought and didn't later sell, and therefore who contributed net buy flow over the last year.

Trades that get closed (i.e., trades that contribute to volume but not ownership) don't have permanent price impact in expectation, and are therefore not useful for answering the question of "why is this stock so high for no good reason?".

  > The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare how their "WEIGHT IN PROTFOLIO %' dropped despite their "SHARES HELD" has remained constant.
I don't get this logic.

If portfolio % drops but shares held remained constant, that means they largely stopped trading NNDM and increased the size of their other (non-NNDM) holdings.

Also, that link shows they traded only a few million in volume in March in NNDM, but total NNDM volume over that month was in the hundreds of millions. So they only traded 1-2% of total volume.

  > Dilution reduces Institutional Ownership %, as well as individuals ownership %
Why do you say this? If they do an at-the-market offerring and sell it on-market primarily to retail bids, the retail ownership % will increase proportionally.


>Institutional ownership does convey relevant information in regards to valuation, because it tells you who bought and didn't later sell, and therefore who contributed net buy flow over the last year.

Institutional ownership merely means (shares held by institutions)/(total shares available). It does not signify anything more, and valuation cannot be inferred from such information. Changes in institutional ownership may signify what you are arguing, but it's a slippery slope.

Anyhow pricing and valuation is all dictated by trading activity. And prices can change massively even with little to no institutional ownernship % or changes thereof.

>If portfolio % drops but shares held remained constant, that means they largely stopped trading NNDM and increased the size of their other (non-NNDM) holdings

You are correct, I mismatched and incorrectly worded what I meant.

>Also, that link shows they traded only a few million in volume in March in NNDM, but total NNDM volume over that month was in the hundreds of millions

What I meant to show here was this was the period of obvious dilution. Look at the months prior to march and see the strong correlation to ARK trading and price rise. There were also offerings being made when ARK was buying, but look at when ARK stopped buying and how the price fell when dilution continued.

>Why do you say this? If they do an at-the-market offerring and sell it on-market primarily to retail bids, the retail ownership % will increase proportionally.

Again poorly worded on my part. I meant can reduce Institutional Ownership %...

Recent activity as of March may be retail activity, but that's not what I meant by recent. Using your very argument, if recent institutional ownership has dropped in March, it wouldn't go against the argument that I'm making that NNDM's price rise (as in starting from last years price at ~$1.58 in September) till recently, was largely fueled by ARK activity.


  > Changes in institutional ownership may signify what you are arguing.
Agreed, but we don't have access to this, so we need to use what's available.

The level of institutional ownership (10%) is useful because it provides approximate/rough bounds on its changes over the last 12 months.

Take the limit to see why it's useful: If IO% is currently 0% (100%), we can conclude with some confidence that a protracted move from $0.5 to its current price of $7.5 is retail (institutional) driven.

An IO% of 10% doesn't conclusively show that a protracted move is retail driven (for a bunch of reasons, some of which you've highlighted), but it does suggest it (especially in this case where all traded volume is recent), absent better info.

  > look at when ARK stopped buying and how the price fell
I feel that this is a bit of curve fitting.

Retail in general has been selling since January. NNDM's January blow-off was largely GME-hype related, and since then all retail favourites have been weak.

Compare the NIO chart to the NNDM chart. They're completely unrelated but topped out at the identical dates and have sold off in the exact same way.

This strongly suggests correlation driven by retail flows. Why else would NNDM and NIO track each other so closely since January 2021?

  > dilution continued.
Was there recent dilution? They engaged with an underwriter at a very high offering price, but the 424B5 doesn't suggest an obligation to buy. Since the price tanked after the date of this engagement, I'd assume that no counterparties would've purchased any stock?

https://www.bamsec.com/filing/121390021009721?cik=1643303

  > Recent activity as of March may be retail activity, but that's not what I meant by recent.
I'm talking about the last 12 months. ARKK only held 5%, which leaves 95%.


>Agreed, but we don't have access to this

We do have access to some info on this. https://www.nasdaq.com/market-activity/stocks/nndm/instituti...

Institutional ownership increased by 21.7M shares in 2020, a roughly 8.27% increase in total shares held. Meaning the current institutional ownership almost all came from last year, and ARK lead that by a wide margin.


True.

But since this is a pretty small amount relative to total outstanding it implies that most buying has been retail.


I'll be honest. What you said is so oversimplified that it cannot be possibly the only factor. Sure there might be a misallocation factor but as others have said, active traders benefit from this.

How do active traders make money? Easy, they make money off of volatility and volatility increases as the market size increases. So greater passive share means more profit potential for active traders.

What is even the function of a trader? A trader is providing liquidity so that buyers and sellers can get fair prices for the thing they want to buy. Who are buyers and sellers? People who believe in the company or in the case of an index fund, people who believe in the index and expect it to net a return in the future. If there are not enough active traders then index funds will pay unfair prices and that is a loss for the index fund.

Now lets get to the meat of your post, zombie companies or rather low productivity companies are a function of interest rates and interest rates are set by the market and usually they are set based on inflation + desired margin. Inflation is low, or at least not high enough, so interest rates are relatively low. The Fed does control the interest rates to some extent but it does so for inflation targeting. However most of the time the Fed rate is slightly above the actual market rate, this is especially the case with negative interest rates where a lot of central banks want to stay above 0% if it is feasible. If inflation goes up the Fed will normalize the interest rates.

High interest rates are a barrier to companies with low returns. If your company makes a 2% return every year and your interest is 3% you will go out of business. If your company makes losses and obtains a 0%-1%% loan then it can stay afloat thanks to the debt.

Now the obvious problem is, if the Fed is doing everything it can to increase inflation and subsequently raise interest rates then why on earth do we see very low inflation? If interest rates are lower than inflation it means everyone (including foreign entities) is putting their money into savings. After all, if people spent it on consumer goods it would drive up prices and therefore inflation. So it isn't going there.

Actually, there is a way for consumer spending to increase savings. China is running a trade deficit by pegging their currency to the yuan. This means the government just outright buys USD so you can exchange them for yuan and the government stockpiles the USD in US treasury bonds. In my opinion they do this because China has an aging population, it's basically a retirement fund, when China is doing poorly they are hoping the US economy is doing well.

Ok, China (and pretty much everyone exporting in USD) is saving. Who else is saving? Retirement funds. The US has an aging population that puts money aside for retirement. It also has a retirement motto that everyone is supposed to save for themselves so even the working population is putting money aside. Rich people save a disproportionate percentage of their salary. They simply cannot spend all of it because they are simply that rich. Think of Bill Gates. A lesser effect also applies to city dwellers in top cities. They get paid a lot more than the countryside. Think of all the people on HN with stock compensation or people on HN who put their excess money into stocks. This portion is growing bigger over time. Automation plays into savings as well. Higher productivity means you can put more money into capital via machines that merely consume electricity instead of spending your money on workers who must consume food and water.

If everyone is saving and nobody is spending then how are workers supposed to get paid for their work? It's clearly impossible, unless that money is being invested and new jobs are being created. This is why people shouldn't put money under a mattress or why we don't want deflation. It will cause unemployment. Give it to your bank and your bank will give it to a company that creates jobs. But since interest is so low or in theory negative (banks don't pass negative interest on) the banks are basically telling you that they don't want your money and you should put it elsewhere.

Enter the stock market and housing market. Low yields in conventional markets (bank accounts, treasury bonds, mortgage bonds, etc) cause investors to flee these markets and enter riskier markets. They will spend it on stocks instead, they will also spend it on housing directly. That's where all those speculators that don't want to rent the house out come from. They aren't looking for a good investment, they are looking for an investment that isn't worse than conventional assets.

It's almost as if we have run out of good investments.


This seems to be conflating buy & hold with passive investing. What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term? Seems to me there is passive and active investing and the opposite of buy & hold is day trading.

I'm also not sure that I buy the argument made elsewhere in this thread that you need active to make passive work. Indexes upon which funds are based often have a system of rules for how individual stocks are added and removed from the index that are based on the companies financial performance which is what ultimately drives the stock.


> What is it called when you don't invest in index funds you pick stocks and then buy and hold them for the long term?

It's not so much about time-frames but rather familiarity with the details of a company or sector, but the term you're looking for is probably value investing.


"A combination of illusory superiority bias—the belief that we are more financially savvy than we actually are—and a culture of financial optimism leads most retail traders to believe they have above-average trading ideas and strategies."

Um, yes. Retail investors as a class lose money.

Remember, you're betting against people for whom this is their day job, work in a business that drops the losers, and have far more money than you.


I see this as more favorable. With the internet, and with like-minded online communities, the average retail trader is way more informed and skilled than one 20 years back. The level of hubris may have corrected accordingly, not be based on illusiory superiority bias.

Incorrect risk management from investment bankers, treating highly-variant finance as deterministic physics, and a fanciness of extremely smart people to invent extremely complex solutions, which obfuscate the ever-increasing assumptions and are less robust to black swan events. This illusory superiority bias over the common man, giving too much authority and decision-making power to a set of mathematical functions, and a culture of financial optimism and realization that you are too big to fail. This is what caused the big crash of 2007-2008.

The common man, as a class, lost money from that crash. In response, Bitcoin and fractional stocks were introduced. New markets emerged, where wearing a suit or MBA seems a negative, not a value add. Now, as a class, you at least have the possibility to win money. Else you always lose (but maybe that's the natural way it is supposed to be, not everyone can be the queen ant, or has the adaptation capacity to become one). BTW: every hedge fund that opened their data to the public, saw better, more accurate, models being build on that, than any of their elite quants in-house was able to beat. The masses, when harnassed, are no match for even the biggest hedge funds.


And 84% of the stock market is owned by the top 10%. I try to remind myself it's not my sandbox.


I kind of hate the idea of encouraging young people to pursue speculation instead of building. Post-IPO investing doesn't create a ton of value for society.


The post-IPO market is the only thing that gives the IPO market any value. Hope of an IPO has encouraged countless people to build things. I have a hard time believing investing has been a net negative to creation at all. If anything, it has increased the incentives in the system.

Post-IPO investing is essential to the IPO which is essential to VC which is essential to startups.


I disagree.

The pricing of post-IPO stocks is responsible for trillions of dollars of capital allocation, since the amount that public companies can raise is linearly proportional to the stock price.

It's not an unimportant problem to get right, unless you think it doesn't matter whether billions of dollars get allocated to GME versus MRNA.

A clown show where GME gets all the funding (due to its high stock price) and real companies don't is not going to lead to a productive and healthy economy.


I know what you mean but this notion of buy and holding index was perhaps a mirage. It’s all theoretical and cynical side of me thinks it was “invented” as a way to appropriate pension and retirement funds into Wall Street machination.


How do you think VCs are getting rich? IPOs and transactions are more profitable than building companies with sustainable business models (by definition, it is usually cheaper to buy a bad company, attempt to flip it in the capital cycle than buy a good company which is likely expensive/impossible to buy).


One thing active trading does is subject you to much higher short term tax rates. You'll also lose a bit on the spread every time you trade, even with zero commission brokerage fees.

The longest stock I've held is Boeing (40 years).


unless you're trading in an IRA


Of course (though the spread will still hurt).

But there's a limit on how much you can contribute to an IRA. A serious investor will find the IRA contribution limits make it inconsequential. You also wouldn't want to fund the IRA with money you'll need before 65.


you can have millions in an IRA if you had rolled over past 401ks etc.


I feel like passive Boglehead rules worked best because it existed in the period when America stacked the deck to make it where stocks always went up and everyone always wanted dollars. America left the gold standard in 1971 and Bogle introduced index fund investing in 1976. I wonder how successful it would have been without lots of unbacked dollars available for decades.

I think we are reaching the end of that era. I guess we shall see.


When ever a16 posts articles there is always bias to the companies they invested within.

Long trade is definitely still around, just wait till everyone has other things to do


> Conventional wisdom holds that passive trading is the rational investing strategy.

That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.

> has catalyzed a lean-in mindset around investing, particularly among Gen Z.

And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s.

The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.


"statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality).

Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)


I don’t think anyone would argue with the statement “if you possess an information advantage then you’re better off actively trading”. It’s mostly in the situation where you don’t have an information advantage that passive investing outperforms (on average). The fun part is that everyone _thinks_ they have an information advantage, but fewer really do.


To complicate the benefit of an information advantage is that regardless of publicly available information, stock price is still set by psychology and that can be irrational. And that leads to the oft repeated "the markets can remain irrational longer than you can remain solvent."


Please correct me if I’m wrong. But I assume that earning while holding is based on an assumption that the overall productivity continues to rise, while active trading is more of a zero sum game. Any gains you earn is somebody’s loss.

Now, the initial assumption could very well hit a wall.


It makes no sense to say that active trading is zero sum but passive trading isn't.

Either both are or none are.

Holding an asset for N days does not magically flip it from category to the other.


Yes, but a bit of no.

Yes, if the market is overall rising, then active trading should enjoy that overall rise just like buy and hold does.

But then why active trade? Because you think you can do better than passive. That part - the "doing better" part - is zero sum. In fact it's negative sum, because of transaction costs.


This assumes that all money stays in the market. Some people selling shares to active traders are pulling money out of the market to use for other purposes. Are they ‘losing’ money because they don’t get the profits from a later rise in price? Maybe, but it isnt so cut and dry.


notice you're contradicting yourself: active traders don't only trade with other active traders, they also trade with those same passive funds that bet on continuous growth in fundamentals of companies and the hope that eventually that growth will be reflected in the stock price.

then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)


> Then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate.

One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio.

Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.


Yes indeed, last I heard passive funds made up 50% of AUM but only 5% of trading. In other words, 95% of price discovery is still done by active managers.


The derivation that in total the passives outperform the actives is not a statistical result from historical data and doesn't require efficient market assumptions at all. It's just basic arithmetic that holds over any time period that the passives as a group will have the same returns as the actives as a group but spend less on fees. Sharpe's webpage on that gives a simple rundown of the calculations:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

That doesn't mean there haven't been long-running active strategies that have worked. But those have overperformed by grabbing returns from other actives underperforming, not the passives.


> From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also.

Let me try to poke some holes in the argument.

1. Market return (M) is a weighted combination of passive (P) and actively managed portfolio (A) returns:

M = (1-w)P+(w)A.

2. Passive investor achieves market return M by holding the whole market, so P = M.

3. To satisfy the equation, A must also be M, regardless of w.

The logical error is in the assumption that P = M. To make this a concrete programming problem: let's say at time t=1, immediately prior to the start of a trading period, a passive investor decides to construct a portfolio. The passive investor makes investment allocations based on the current set of market prices.

Subsequently, how can the passive investor possibly match market returns without w being 0, or the passive investor knowing exactly how the active investors will allocate their holdings? That information lies in the future - one only needs to go though the exercise of simulating market returns on a discrete time basis to realize that the passive investor cannot possibly allocate to achieve exactly market returns.

M[1] = (1-w[1])P[1]+w[1]A[1]


> Subsequently, how can the passive investor possibly match market returns without w being 0, or the passive investor knowing exactly how the active investors will allocate their holdings? That information lies in the future - one only needs to go though the exercise of simulating market returns on a discrete time basis to realize that the passive investor cannot possibly allocate to achieve exactly market returns.

Because all he has to do is do absolutely nothing and he achieves that. The passive investor doesn't make choices, he buys a portfolio that has all the components of the index in the proportions at that point. Then the active traders trade among themselves and the prices move. And now the passive investor still holds all the components in the index at the proportions at t=2 because he hasn't traded, only the assets have changed value. You can observe this in practice. Index funds track their index incredibly well.


The mistake you make is to think of two groups, when there are actually three. Active, passive and "outiders", who got their stock outside of the stock market. Maybe they are early investors or maybe they get stock as part of their compensation package.

If passive investors make worse trades with outsiders than the active investors do, they will underperfom.


If there’s anything different about GenZ, it’s that they’re crowdsourcing their plays, making them behave more like a distributed mutual fund than a bunch of gamblers. Time will tell if that performs better.


spoiler: it won't. There's going to be outperformers, just like if you have 1000 people flipping coins, you're going to find a few with an uncanny ability to get consecutive tails/heads after several flips. That doesn't mean they're any good at it though.


The average of the coin flip will be near 50% though. If you let a 1000 people give their opinion on if a stock is up or down in a month, you are likely to do better than random guessing (opinion is a weighted coin). For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio.

You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information.

Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise).

Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.


>For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio.

Source? If by "random" you mean "randomly pick a company off the stock exchange using a uniform distribution and then buy/sell based on the result of a coin flip", you might be right. However, if your "random" means "randomly picking stocks on a market-cap weighted basis and then holding" (ie. passive investing), I'm going to doubt your claim.

>You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information

The problem here is that all that information is public and the amount of alpha is scarce. What I mean by the latter is that if the crowd through its wisdom decides that GME should be $10 higher, and everyone starts buying up shares, it will reach its target price in no time. If the information is kept secret, you might be able to reap all the gains, but since it's public everyone else is trampling over each other trying to get a piece of the action, diluting or even eliminating the benefit for everyone.

>Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise).

The canceling-out effect only works if they're clueless and are just flipping coins, but doesn't work if they're clueless and are all trying to buy into the same bubble.

>Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month

You do realize that the stock market is exactly that, right? A crowd-sourced prediction engine. Every participant makes their best guess at what the price should be. If they think the price is undervalued they buy shares, pushing the value up. If they think the price is overvalued they do the reverse. Through this mechanism the market collectively obtains the price of a company.


For instance the ISMIS 2017 Data Mining Competition: Trading Based on Recommendations https://link.springer.com/chapter/10.1007/978-3-319-60438-1_...

And I think it is enough to claim that the average of the recommendations was better than any individual stock picker.

> The problem here is that all that information is public and the amount of alpha is scarce.

Not insurmountable, no? I feel these objections are often busied by finance professors, after a student rudely assumes they wouldn't be teaching if they knew how to make money.

RenTech was doing speech recognition on foreign TV broadcasts in the 90s. Can't you think of similar features you could whip up in a 100 lines of Python and the YouTube API? Some very profitable companies hire very smart PhDs to that for them. Could you bootstrap this? Work harder? Extend to some new hip platform a well-paid quant has never heard of?

> trying to get a piece of the action, diluting or even eliminating the benefit for everyone.

So join in. You are aware of the action. It's not like we are doing this for a bit of fun. The crowd wisdom is there, the hedge funds don't have a monopoly on polling it or analyzing it. Then redistribute the wealth for the benefit of everyone. Those very hard in on the action are not going to.

> but doesn't work if they're clueless and are all trying to buy into the same bubble.

Yes, this is correct, and a big problem in crowd analytics. Or at least, it has a big negative effect (you ideally want everyone to make decisions of their own accord, using their own information). But you can also again harnass this with counter trading strategies. Over the years, it has been fairly easy to call the top of a hype, and predict the obvious correction. So for instance, if the Teletubbies twitter is tweeting about Bitcoin, you know that maybe now is time to sell some Bitcoin, and rebuy back in 6 months when all newspapers are writing about how Bitcoin is a scam and a world-wide crypto ransom attack just occured.

The problem can be overcome in a couple of ways. An interesting one is: "skin-in-the-game". If your wrong hype predictions damages your reputation or causes money loss, you are more serious about it. Another is to ask: What percentage of other people do you think got this question wrong? People who answer Sydney as the capitol of Australia, think that few got it wrong. People who give the correct answer think that many will get it wrong.

> You do realize that the stock market is exactly that, right?

Partly yes. The difference with crowdsourcing is that you are building a model on top of the other participants. Many day traders with bots do not know that hedge funds have models more complex tracking what they are doing and going to do, than the bot is complex. But many day traders also underestimate how they'd stack up against an office of suits, if they worked together, and ramen-noodle hacked it.


>For instance the ISMIS 2017 Data Mining Competition: Trading Based on Recommendations https://link.springer.com/chapter/10.1007/978-3-319-60438-1_...

uhh..

>The winning one did not manage to achieve results better than the baseline that was constructed as the maximum from ‘always buy’ and ‘always sell’ strategies over the testing period

Like I said, the benchmark isn't against a monkey randomly picking a stock, it's against a passive portfolio.

>Not insurmountable, no? [...] RenTech was doing speech recognition on foreign TV broadcasts in the 90s. Can't you think of similar features you could whip up in a 100 lines of Python and the YouTube API?

>So join in. You are aware of the action. [...]

That goes back to my remark about how alpha is limited. If you whipped up a script but was 10 minutes late to the party, then you'd get zero gains because someone has already beat you to the punch. The hard part isn't good data, it's getting good data that everyone else doesn't have.

>But you can also again harnass this with counter trading strategies. [...]

that almost sounds like "timing the market", which is generally known to not work for unsophisticated investors.

>The problem can be overcome in a couple of ways. An interesting one is: "skin-in-the-game". If your wrong hype predictions damages your reputation or causes money loss, you are more serious about it

The fact that they're publishing the trading strategies for anyone to use for free should tell you all you need to know about their "skin in the game". If they actually thought they had real alpha, they'd be harnessing it all for themselves, not publishing it on the internet and getting freeriders to dilute it.

>Another is to ask: What percentage of other people do you think got this question wrong? People who answer Sydney as the capitol of Australia, think that few got it wrong. People who give the correct answer think that many will get it wrong.

[insert joke about how economists have predicted 15 of the last 3 recessions]

>But many day traders also underestimate how they'd stack up against an office of suits, if they worked together, and ramen-noodle hacked it.

I don't doubt a bunch of random internet traders can outsmart an office of suits, I just doubt they can produce better returns (% wise) because their open planning (ie. posting their trades online for anyone to see) allows their alpha to be diluted and get front-runned.


> Like I said, the benchmark isn't against a monkey randomly picking a stock, it's against a passive portfolio.

At least we went from beating a fair coin with a crowd to benchmarking against a passive portfolio :)

The quote just means that the winning model was overfit to leaderboard. Not that there weren't better models submitted than the baseline, for else someone submitting the baseline would have won.

> If you whipped up a script but was 10 minutes late to the party, then you'd get zero gains

See, I really don't believe this. You can use the script features for longer timelines, then there is no rush. You are also not as much competing with the smart money, as you are joining them. I really don't think those few 1000s $ someone early on spends, are taking any action of the table. And the big players can't take it all.

> that almost sounds like "timing the market", which is generally known to not work for unsophisticated investors.

counter trading as in https://www.investopedia.com/terms/c/countertrend.asp

but yes, would need both sophistication and time investment, else passive way more attractive. But you can use crowdsourcing on overhyped trends as information for this strategy.

> should tell you all you need to know about their "skin in the game"

I am not saying that newspaper stock pickers solved the problem of mindless hype. But skin-in-the-game or staking is an effective counter against clueless people following trends, and moves it further away from the coin flip.

> [insert joke about how economists have predicted 15 of the last 3 recessions]

[Insert fact about how those predictions cluster around the last 3 recessions]

> allows their alpha to be diluted and get front-runned

If anything, this would happen at the real front: hedge funds would contract someone to contract an expensive New York PR firm to meme and astroturf some stock, say Palantir, to something noteworthy. Then the open planning online for anyone to see does the rest. The private Discord channel of random traders (who bought into that group with 5 BTC to have skin-in-the-game) knows what's up, and quietly rides along.


>At least we went from beating a fair coin with a crowd to benchmarking against a passive portfolio :)

I agree it's not a perfect analogy, but the underlying point holds: there's inevitably going to be some that come out on top because of luck, rather than actually skill.

>The quote just means that the winning model was overfit to leaderboard. Not that there weren't better models submitted than the baseline, for else someone submitting the baseline would have won.

So the study is inconclusive at best when it comes to forward-looking results?

>See, I really don't believe this. You can use the script features for longer timelines, then there is no rush. You are also not as much competing with the smart money, as you are joining them. I really don't think those few 1000s $ someone early on spends, are taking any action of the table. And the big players can't take it all.

The problem is that once the information has been priced in, there isn't anything to gain anymore. For instance, let's say company A shares are selling for $100 each, and you found out that company B is planning to acquire company A at $120/share. If you found out this information before anyone else and traded on it, you can make a profit of $20/share (ignoring using leverage or derivatives). However, if you were late to the party, ie. found out this information after others did, and the price already rose to $120, then there's nothing to gain from it. Buying the shares at $120 and then selling it at $120 doesn't net you any profit. This example uses an acquisition as a pricing event, because it provides an unambiguous price target, but this can extend to other events as well, such as finding out this quarter's earnings is above/below estimates.

>but yes, would need both sophistication and time investment

therein lies the problem. There's no free lunch here. You can't blindly apply the rule and get stacks of cash. Citing "countertrend" in this case is only marginally more helpful than citing "buy low sell high".

>[Insert fact about how those predictions cluster around the last 3 recessions]

source? Here's one I found to the contrary. https://www.bloomberg.com/news/articles/2019-03-28/economist...

A recent working paper by Zidong An, Joao Tovar Jalles, and Prakash Loungani discovered that of 153 recessions in 63 countries from 1992 to 2014, only five were predicted by a consensus of private-sector economists in April of the preceding year. And the economists tended to underestimate the magnitude of the slump until the year was almost over.


Or they're just getting played by finance "influencers" who buy into trades first and make most of the profits


As someone who is doing buy and hold and not doing any day trading, how can I protect myself from the wild swings of the market caused by active traders gambling?


Dollar cost averaging[1] which is basically you buy any security every x amount of days. This is usually how a 401k is setup where you buy a mutual fund every time you get a paycheck.

[1] https://en.wikipedia.org/wiki/Dollar_cost_averaging


401k contributions aren't really DCA. It would fall more accurately under DCA if you were given the entire year's 401k contribution at once, and still chose to invest it periodically, rather than all at once.

Or if you got a $10k bonus, and invested it over 6 months or something.

FWIW, lump sum usually beats DCA in the long run.


You may have missed something important, which is you should have some ideal portfolio balance in mind when purchasing. This forces you to “buy low and sell high” in that you buy whatever you need to to bring your percentages in line with you’re ideal. This is the only strategy I’ve seen that provably beats the market (and it’s been a while since I saw the paper talking about this, may be that it only beats the market in terms of total risk adjusted returns, and not total dollars returned).

Edit: also it’s important that you’re asset portfolio has asset classes that tend to be out of phase, like stocks vs bonds.


Worthwhile to read the full article, as well as the sources, and decide what is best for you.

> The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy.

> Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.


It's not a 'strategy' really. Most regular Joe investors earn a salary every month, and keep spare money invested in the market. DCA isn't a choice in this case, it's the natural result.


It is a strategy. If you sell your house and invest the proceeds into the stock market, DCA says you shouldn't just do one huge buy order, but you should spread your orders out over a longer timeline. It's two different strategies.


That's an extremely rare case.


Buy and hold investing is generally long term. If you are holding for 10+ years, the effects of active traders and day trading gamblers is basically just noise.


Well, those swings won't hurt you if you hold. That's the point. But if you were like a farmer and had to sell at a certain point, the protection could be through derivatives. You might do the same with stocks if you were planning to sell at a given time in the future (eg, if you planned on buying a house in 2022).


The wild swings only affect the meme stocks. Just stay away from those and you'll be fine. "The market" is a lot bigger than one group of gamblers can affect.


you have to be aware of the macro environment: reflation, deflation, stagflation and growth all have different assets being better than others. currently we have reflation, so growth companies melt up, finance earns more due to rising rates, etc. once deflation comes you should be mostly positioned out of stocks, so you don't get blown up. 20% drawdown will get eventually compensated, but if you can avoid it, you've just added 20% to your base of compounding interest.


While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well. The people in the discord server that I belong to are all using stops to max their downside and get out quick if their instinct proves wrong. After several months on paternity leave, it became clear that greatest barriers to active trading are money and time, like most things. If you’re treating the market like it’s your job, day in and day out, you get a really good feel for the flows, and can move into positions that are turning north pretty easily. The fact that the Nasdaq was about to go on a tear was telegraphed for weeks.

There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain.

If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work.

Once you’ve got entry down, the hardest part is training yourself to exit at the right time.


> there are pockets of young people partaking in sophisticated strategies, and doing quite well.

If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run.

It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.



Here comes that squeeze up around 4160. I would expect things to turn south today or tomorrow, but I'm only half watching the markets now that I'm working again.


I wouldn't go that far, there is always outliers. But I would also bet that on average they will do worse than the market.


They’re making money up and down. For example, SPY is likely done climbing for a while. Maybe it will squeeze up to ~4160, but it’s either going to be flat or aggressively down in the coming days. Thursday/Friday was a very clear exit day. If it squeezes north and over extends further, it’s a very clear short. If it sits flat for a week until OPEX, it’ll be a clear buy for another leg up, then you reevaluate again.

This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion.

Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it.

The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions.

It’s like turning a freighter, versus turning a speed boat.


Maybe I'm a bit of a skeptic but I've seen this sort of behavior repeat itself over and over again with crypto. Maybe the people in your Discord group are really smarter than almost everyone else, but at the end of the day the vast majority of day traders who think they are using sophisticated strategies are just gambling.

I'm not saying it's impossible to make money - I just doubt you can intuitively get a sense for the "feel" of the market for something as largely traded as SPY. SPY traded 61 million shares yesterday (at $400 per). If the smartest institutional traders with the best tools can't figure out the direction of SPY in the short run with any kind of certainty, I don't see how an "average" person can. There is enough volume in the markets for institutions to turn around a pretty big freighter.


> Maybe the people in your Discord group are really smarter than almost everyone else.

I think this is akin to the unintuitive finding that if you randomly chose someone from your friendlist, there is good chance that this person is more popular than almost everyone else. Just being in the friendlist is a positive factor to the capability of making friends.

The vast majority of day traders is not honing their skills and information sharing inside a dedicated Discord group. Especially in crypto, these groups, and not the big Wallstreet hedge funds, are the most sophisticated and skilled at profiting from smaller markets.

> If the smartest institutional traders with the best tools can't figure out the direction of SPY in the short run with any kind of certainty

This is misunderstanding trading. It is all about uncertainty and willing to take risks if EV+ situations arises. Extremely few are figuring out the short run with any kind of certainty, and these few risk being fined or charged with market manipulation. The average person can find profitable coin flips (56% accuracy), which, while far from certain, can be flipped many times. Sometimes such flips are not possible for the bigger smarter institutional traders, because their plays use way more money, and they focus on what they learned over 30 years. Anyone starting in 2010 is able to be more knowledable about crypto trading, than someone with a 50-year trading career (who pays someone a little-less-knowledgable than you, not in-the-know of Discord or Telegram, to write an analysis).


My point is that they can, to a degree. The bigger challenge for them is scaling in and out of the size of positions they need to be in to be profitable.

If you’re playing with thousands, you’re playing a completely different game than someone playing with billions. You don’t have to strategize about how to exit. You just exit.

Many hedge funds outsource the execution of their trades to HFT, which scales in and out over days.

Google Archegos if you want to see what happens when you liquidate billion dollar positions in a hurry.


My point is that they can, to a degree. The bigger challenge for them is scaling in and out of the size of positions they need to be in to be profitable.

If you’re playing with thousands, you’re playing a completely different game than someone playing with billions. You don’t have to strategize about how to exit. You just exit.


> Only to those of us with other work to do, did it look like a flash crash out of nowhere.

The market crashed last year because of COVID. Nobody saw that coming.

Everyone has been predicting a major correction or recession every year for at least the past 6 years. Claiming that they predicted what was going to happen last year is pretty blatant confirmation bias.

People predict a recession every year, and then when one finally hits, they say "see, I was right! Ignore all the years where it didn't happen!"

There will be another correction in the future, we don't know when it will hit, and the same pattern will play out again.


No one saw it coming in January. Everyone saw it coming the week that it was starting, which is my point. It’s really easy to tell when the big players start taking risk off.

These people are also tracking senators and congress people’s positional moves, as additional macro indicators.


Did those same people see the subsequent bull run, that occurred much faster than most were predicting?

There's a lot of people who think they're smart enough to time the market, but have just been lucky. In the long run, that catches up to most of them, which is one of the reasons passive investing wins out in the end, on average


I found private information posted on 4chan around the 28th of January 2020. It spoke of: the upcoming variant strains, the upcoming lockdowns in Italy, the downright panic with public health officials as they were made aware of how awful COVID is and the need to avoid this panic --so large cities would not find refugee in small towns, leaving only criminals and the poor, effects of "long-COVID" and teleworking on the future economy, the sad fate of those who would die after cytokine storm caused their lungs to fill with bloody liquid and choke (financial analysts are more blunt, reputation-free, than epidemiological analysts). That the financial elite was preparing for the upcoming impacts, and that all money managers were working day-and-night to rebalance and counter risks, aware of the possibility of a (malicious) lab leak (economy collapse, world war, CEO's dying, ...).

The posts said that gold would see decent increase (was around 1650$/kg at the time). That everyone with hotel or travel investments was expected to severely lose, and that most such players were putting their liquid money into other investments, to counter the blow, and avoid charges of insider trading. That the Euro would be the most stable currency, when currency trading due to localized pandemic and the lockdowns effecting purchasing power. That the US stock market will see a short boom, with Fed support, and little other investment opportunities, before a crash and world-wide stagnation will become inevitable. That you want to be in two growth niches for the next 3 years: biotech, for it will see free government-funded research & development, when it can profit in the future on new high-margin (HIV/Herpes) vaccines. Plastics industry, because everything will be wrapped in plastic, environmental regulation will be low priority, and it will be overlooked by retail and play-safe pension funds.

Not only did the financial elite predicted it, they predicted it right. Then felt bad for keeping it private, when they saw US senators selling their hotel stock positions after being informed of the situation in China and prospect of a pandemic, so they posted it publicly for everyone to see and with nothing to personally gain.

The pandemic was predicted (+5 -5 year error bars). The correction was predicted. Individual recession predictors are mostly made through survivor bias. When Goldman Sachs sees a market recession upcoming, they don't put that on Twitter or a newspaper to gain a following. They have people pay for what its worth.

It is also fun going back to 4chan /biz section 5 years. People are not saying now: see, I was right. They did better than the majority of the best, highest-paid, analysts and quants and remained anonymous. But I agree it was really hard to not hit a fish when shooting in a barrel.


What's remarkable to me is that I know you think you're saying something useful and reasonable, but to me you sound indistinguishable from an astrologist. Practically every word sounds more pseudoscientific than the one before it.


> clear exit, very clear short, clear buy

You seem very sure about where the market is going in the short term, you should start a hedge fund!

Or course, I'm kidding, internet financial hot takes are a dime a dozen, and generally worthless.


> It’s like turning a freighter, versus turning a speed boat.

That is an apt analogy, which is why I believe Rentech’s Medallion fund is kept small and has better returns than other larger funds.


> While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well

Active trading will is more likely to have larger swings than passive trading.

In the short-run the good times will be better and the bad-times will be worse.

In the long-run, statistically the majority (not all!) that play the game will lose over the long run to passive investors.

None of this is to argue for one of doing things over the other so long as people understand the risks that they're opting into.


I see two issues there

1) confirmation bias. Many people have blind faith in the market and while trends are semi-reliable. There are plenty of instances that buck all trends and can take out even the most seasoned day traders accounts if the overrely.

2) a lot of times these are pump and dumb schemes, even by large hedge funds on small companies that are generally overvalued by the time the “opportunity” hits those reading the standard info sources.

So as someone simply managing my own account. A solid strategy is to avoid day trade and only place buys on something you are good to be long on and have faith in. These are big ones like Microsoft or apple or Costco.

I still invest in companies I’m very knowledgeable on but I don’t take risks on nonsense. And worst case I’m long in some stock for a while But I don’t have to monitor it to the minute nor do I have to really coughing up fees for managed funds at a massive scale.

Sure I miss plenty of plays, especially intra-day or intra-week but I also don’t lose anything on those.


Is this discord group open for everyone? If yes, would you mind sharing an invite link?


Any statistical prove makes certain assumptions and as with every assumption, there are diverging views. In that particular case, the prove ignores any aspects that cannot be modelled and then be tested like, e.g., domain knowledge that gives you a headstart over other market participants. As always, I'd say the truth is somewhere in the middle.


> The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground.

There is a certain rationality to this, when you're coming from so far behind.

If you need a million dollars and you start with $200K, you set a timeline and a prudent plan.

If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble.

I do not necessarily advocate the latter. I'm just articulating the thinking/emotion.

[0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.


It will just make buy and hold that much more beneficial.


But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?


Why do you think prices are completely detached from a company's financial viability and business profitability?

If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.

Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.


> If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.

The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.


> If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.

Sure, but that's a big if. We're a long way from 100% anything.

Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance.

In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market.

Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.


  > active strategies lose out to passive ones in the long run.
This is only true in the average. Most people can't do it.

It's false if we're talking about specific strategies (e.g. Medallion Fund).

There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.


This is true historically. But at certain times it's a complete no-brainer to enter the market or not. For instance consider post Covid at around March/April 2020. Stocks have dropped 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20% drop in e.g. Apple justified, or is it simply free money?


How far would the stocks have fallen if the US hadn’t pumped absolutely massive amounts of money into the stock market? When it falls and keeps falling people suddenly realize how worthless all the paper stocks they have been buying are and don’t want to keep buying more. I suspect 30% drop would have been the tip of the iceberg and no one asked me if I wanted my tax dollars spent this way so the rich that own all the equities could keep their paper gains.

Top 1% own 38% of the value in stocks.


Or were we on the verge of a complete global economic meltdown? I admit I transferred a fair bit into very safe investments at the time. As a result I didn't do as well as I could have (but well enough). But it was still a reasonable hedging strategy IMO.


> This is true historically.

Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.


I did this exact thing and got in big in march 2020. I also heavily bought US tech stocks the day brexit passed. To me it seemed like free money.


What it does do...for sure is make you go crazy.

Traders are pretty wired.

People building long term businesses (Like 10 year horizon plus) are on a different gravity.


So Jane Street and James Simons do not exist?


Jane Street and RenTech are very different institutions compared to something like Vanguard or Fidelity. They aren't accessable to retail investors/traders, they have different goals, and methods.


Nope, you're moving the goalposts now. The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.


> The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.

Correct.

Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years.

VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years.

On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.


Jane Street is primarily a market maker I believe, not something an individual or even a small institution can just go out and do


It probably depends how active and how sophisticated. (And how lucky.) Certainly there are large sophisticated endowments and investment funds that don't simply stick everything in an index fund and call it a day. And many do get better than S&P 500 returns. After all, you need to decide what investments to buy and hold and, presumably, make adjustments over time even if turnover is relatively low.


There's always winners of the lottery but statically it wont be you.


1) Jane Street isn't that successful. 2) RenTech spends billions every year on compute, data and hiring the smartest people in the world.

The average person could never compete with RenTech.


> The average person could never compete with RenTech.

Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.


> Jane Street isn't that successful.

Their historical record is very good.


I think it's pretty obvious that the parent is talking about the average investor.


> I think it's pretty obvious that the parent is talking about the average investor.

Really? Because this is what the (grand)parent said:

"Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run."

Clearly grandparent was not talking solely about the average investor.


Yes but it's also a fair point that a lot of actively-managed mutual funds out there don't beat low-cost index funds.


I’m not arguing the opposite, but I’m very interested in learning more about this. Can you suggest some references?


The basic idea is that if you do better than the market - because you have more of the good stocks and less of the bad ones - there may be someone somewhere with the opposite positioning.

In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.


A reference (that lays out the statistical arguments) is "Common Sense on Mutual Funds" by John Bogle.


Thanks


How many folks are out there as active traders? I'm not sure how big en masse really is here.


Value investing strategies sometimes beat just buying the index.


it used to be like this but now ETFs hold so much weight in the US market that you can easily front run additions/removals for relatively easy money.


I'm running counter-current here. I bought a vaccine maker last year, putting a quarter of my stock portfolio in it over time (several buys on dips). The vaccine maker was then approved, and is one of the biggest ones rolling out globally. This wasn't a one off, as I continued to follow the news and bought more blocks over several months. My portfolio is up a significant amount. On one year blocks, I'll start to sell since it'll be taxed as long-term capital gains. That's non retirement brokerage account. Now in my IRA, I buy and sell every few months on dips and peaks. It doesn't have to be perfectly timed, but it's going up. My portfolio is 70% cash and I've been beating the market the past 5 years.

Other winners include tech companies and a space company.

Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.


Stock picking basically has random outcomes. Sure, you may have a few lucky wins in the short term. But over time, your losing bets tend to outnumber your winning bets, and your returns experience what's called reversion to the mean.

This phenomenon has been shown repeatedly in studies of trading behaviour among individual investors (e.g. [1] and [2]), who have been found to collectively destroy wealth for all other investors. Only an absolutely minuscule proportion of traders actually beat the market.

As with any casino, there are winners and losers. But usually the house wins.

[1] https://faculty.haas.berkeley.edu/odean/papers%20current%20v...

[2] https://www.sciencedirect.com/science/article/abs/pii/S13864...


Haha, random. Good one. The tech bull run in the last decade has been random? There's no getting through, here.

Stop comparing traders and active funds in your study citations. That's not the benchmark. I'm not a fund (which has its own issues as it has to manage 100s of millions which is different than an account like one of ours), and I'm not a day trader/trader. Buying and holding stocks is hardly a zero sum game. You're confused with day trading and options trading which DOES have two sides of a bet. There's something about humanity that some folks here fail to understand when their noses are in the numbers. Are you trying to sell to me the idea that buying AAPL in the early 2000s was a random pick? I'm done here, all that's happening is I lose points as punishment for questioning orthodoxy.


Buying AAPL in the early 2000s seems obvious now, but it was not obvious then. Prior to the iPhone, in the midst of a market dominated by the likes of Microsoft, a lot of people had very low expectations for Apple. The chances of AAPL beating companies like XOM or GE were not predictable at the time, and you can say the same today about any stock. At the time, you could of course argue for why AAPL would have enormous future growth, but it wouldn't be a prediction, but a bet.


Uncertain it was, but it is not the same as the word used before, random.


> Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds

Simple: you got lucky in a bull market.

Let's revisit how you're doing in the next recession or after a couple bad bets.

If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.


Why would I have the same strategy during a bear market? How do index funds fare during a bear market? Might the 70 pct cash I have be used for non equity investments, like real estate?

There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.


Well you can keep arguing based on your feelings. I'm arguing based on data. You can choose to ignore that data and try your luck. Just recognize your past performance will not guarantee future returns.


Tell that to the legions of Silicon Valley employees who get paid in publicly traded stock as part of their total comp. Those no good, gambling, risk-taking, market-timing risk takers, them! Didn't they read Bogle?


I wouldnt call you an imbecile, but your portfolio is 70% cash? Cash is trash, as they say.


Dry powder for the next thing. Property?

Index funds are high risk! What if there's a big dip and you find the perfect house?

Bond rates are low and a bit uncertain at the moment. What's your 'cash replacement'?


> That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.

This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.


Warren Buffett's investing performance can be explained by an intuitive understanding of known market factors (the French-Fama five-factor asset pricing model, etc.) [1].

The Medallion fund is a whole other kettle of fish. Medallion uses extremely sophisticated models which took Jim Simons and his team of math wizards more than a decade to figure out, using vast amounts of historical data and computation. The fact that nobody else is replicating their performance should tell you just how difficult it is.

In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P. In 2020, it was "just" 57% [2]. Meanwhile, 70% of active funds have been liquidated the last 20 years. There are of course years where actively managed funds are the winners, but over time, actively managed funds tend toward the mean, either lagging or matching the S&P 500.

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185

[2] https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-y...


> The Medallion fund is a whole other kettle of fish.

It should be noted that while markets may be mostly efficient, I do not think anyone is claiming they are completely efficient.

If there are price discrepancies/anomalies, they could be exploited, at least some of the time. It could be that Medallion can find some and exploit them, say, 55% of the time. But over a large volume of transactions.

Casinos make huge profits by exploit small house edges in volume:

* https://wizardofodds.com/gambling/house-edge/

There's a reason why Medallion has been closed for years: the (possible) market inefficiency exploits they're using may not scale.


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> It should be noted that while markets may be mostly efficient, I do not think anyone is claiming they are completely efficient.

This is false. Grandparent is specifically claiming that markets are completely efficient. Here is a direct quote: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run."

In addition, many academics are also making this same ludicrous claim.


> In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P.

Yes, you have a market where participants trade against each other, and you discover that the average participant in the market does not "beat the market". That should be obvious. The question in dispute is whether _anyone_ can beat the market, and there's a mountain of evidence that certain people/funds beat the market year after year.


Yes, you can beat the market. But anyone cannot beat the market.

This is a problem for retail investors. Studies such as this one [1] have shown that the past performance of an actively managed fund does not predict its future returns. In other words, while there are certainly actively managed funds that beat the market in some years, a retail investor picking a mutual fund based on past performance is likely to be disappointed.

So how do you pick the fund that will give you high returns? Turns out this is exactly the same problem with individual stock picking, but instead of trying to pick winning stocks on the stock market, you are trying to pick winning managers in the mutual fund business. And your success in doing that ultimately comes down to chance.

[1] https://insights.som.yale.edu/insights/does-mutual-fund-s-pa...


> Yes, you can beat the market. But anyone cannot beat the market ... a retail investor picking a mutual fund based on past performance is likely to be disappointed.

We are in 100% agreement.

I only wanted to correct the misinformation spread by grandparent who claimed that nobody can beat the market.


2020, Renaissance funds' performance:

Closed to outsiders:

Medallion, +76%

Open to outsiders:

RIEF, -23%

RIDA, -34%


You forgot to mention that the external funds have performed exceedly well (20+%/year) over the past 15 years even after a 44% performance fee.

Also the external funds are different strategies than Medallion.


> 2020, Renaissance funds' performance ...

Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?


I don't disagree with you that individuals can outperform the market.

I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.


If I were investing someone else's money, I'd be happy to put a little in RIEF and RIDA in exchange for medallion shares.


1. I think you'll find that funds that consistently beat the market for so many years are not taking investments. 2. Buffet himself says: "In my view, for most people, the best thing to do is to own the S&P 500 index fund"


> 1. I think you'll find that funds that consistently beat the market for so many years are not taking investments.

Yep, I agree.

> 2. Buffet himself says: "In my view, for most people, the best thing to do is to own the S&P 500 index fund"

Again, we are in agreement. I'm not sure what exactly it is that you feel you disagree with me about? Grandparent claimed that _nobody_ can beat the market, and I provided references to evidence that some people can beat the market.


Many folks see Boglehead-ism as some sort of science. It’s not bad advice for a disinterested investor in the US, but not exactly optimal advice either.

I’d rather have my AAPL over the last 5 years than VTI+BND.


Yes, generally picking a winning stock is a winning strategy.


What would you rather have for the next 5 years? Why?


Citadel hedge fund. 19% annual return. After fees. For 30 years [1].

The most popular index funds (VTI, VGT) only have a 20-year track record, with a paltry 9% and 13% annual return, respectively.

[1] https://www.clearbrookglobal.com/citadel-millennium-d-e-shaw...


The Vanguard 500 Index Fund (VFINX) has existed since 1976.

Kenneth French (the "French" in the Fama-French asset pricing model) provides market data going back to 1972 [1] and can be used to reconstruct index fund performance.

Citadel doesn't have individual clients, and if you're not a billionaire I don't see how you'd gain access to their hedge fund.

[1] https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data...


Huh? The first index fund was started 45 years ago, and indexes existed and are tracked far longer than that. Tell me what percentage of hedge funds beat the S&P over the last 50 years?


If you cherry pick the US S&P (over international, and over small cap), I’m allowed to cherry pick hedge funds.

Many funds consistently outperform the S&P by 2-3X over 30-40 years. Minimum investment, $5-10M, of course.

Buy and hold is the best option for those under USD $10 million net worth, but you must acknowledge there are semi-closed funds/prop trading firms that consistently beat the market.


Yes, just like there are individual stocks that beat the market. How do you pick them?


Stop being poor so you can go into those badass hedge funds that always beat the S&P 500 /s

But seriously, I'd rather just put money into VTI and VXUS and go back to playing video games, planning a D&D one-shot, programming a bit, or hanging out with friends in my spare time. Let the active traders waste their time poring over 10-Ks and/or charts. I'll be here having fun and taking what the market gives.


> Yes, just like there are individual stocks that beat the market. How do you pick them?

The same way you picked your passive index fund: look at 20-30+ years of data.

Unfortunately, VTI, VT, VOO all underperform the top hedge funds, when evaluated over 20 years (risk adjusted return, downside deviation, and absolute return). I’d go further back but VTI was created in 2001 whereas the hedge funds were created in 1980/1990.


I picked S&P because it's one of a handful of widely reported indices and it was created roughly in the same era as the original vanguard index fund, not by cherry-picking data.

Your statement that major index funds all underperform the top hedge funds is tautological, of course the ones that beat the averages are the top funds. What I'm genuinely curious is: how many hedge funds were there in 2001 and how would you identify the top ones?


Simple: don't be poor and know people (/s).

The other important question is whether a retail investor can join it. I know someone like baobabKoodaa [1] would shout from the rooftops, "You're moving the goalposts, grandparent, waaaaaaaaaaah!" Well, I'm not grandparent, so my goalposts are completely different from theirs.

My goalpost is whether a retail investor like me can get in on those high-flying funds. If not, then in the retail universe, they may as well not exist. Thus, I'm better off investing in VTI/VXUS and using the rest of my spare time coming up with some funny ways to challenge my party in a D&D one-shot.

[1] https://news.ycombinator.com/threads?id=baobabKoodaa


What percentage of hedge fund clientele exclusively invested in a single hedge fund 50 years ago? Many index fund evangelists focus on that assumption. It’s a strawman.

You can invest actively and intelligently. For example, my 401k offered an emerging markets fund (MGEMX) that isn’t the ideal fund from a cost structure perspective... but it performed really well for a few years. It wasn’t speculation or reckless behavior to have exposure to that sector. Portfolio rebalancing booked my gains when it was rising 30%, and I ended up doing well when 2008 killed that sector.

That doesn’t mean buy and hold doesn’t make sense either. If I was lucky and held on to an early fun money Bitcoin buy I’d be on an island right now!


You are using individual instances to disapprove statistical observation? Ate you seeing the contradiction here?

...


That makes no sense. The claim I'm disputing is of form "X is true for everyone". A single counter-example is sufficient to disprove a claim of this form. Grandparent claimed that everyone would be better off investing passively than actively. So a single counter-example of a genius like Simons is sufficient to disprove that claim.


Passive or active is not binary. Berkshire Hathaway’s strategy is passive by the WSB generations standards.


Please stop trying to re-define words which already have an established definition. "Passive" and "active" investing are well defined concepts, and Berkshire Hathaway falls squarely in the "active" category.


Fair criticism of my phrasing, but at the same time you can't put day traders, HFT, or most hedge fund strategies in the same bucket as Berkshire Hathaway. There is a distinct difference in time horizons behind the strategies.


active = alpha; passive = beta;


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